Transfer Pricing 101: What Indian SMEs Get Wrong When Going Global

Transfer Pricing 101: What Indian SMEs Get Wrong When Going Global

It's Not Just a Big-Company Problem

Most Indian founders think transfer pricing is something multinationals worry about. It isn't. The moment you set up a subsidiary abroad or start billing an overseas entity you own, you're in transfer pricing territory, whether you know it or not.

The simple version: transfer pricing is the price one related entity charges another for goods, services, or money. Your Indian company charges its Singapore subsidiary for software development. That charge needs to reflect what an unrelated party would pay for the same service. If it doesn't, and it can't be documented, the tax authorities can reassess your income and levy penalties.

The Four Mistakes That Keep Coming Up

These aren't complicated errors. They're just overlooked ones.

Pricing based on convenience, not market rates:
An Indian parent company providing management services to its overseas entity for free, or at a steep internal discount, is a red flag. It needs to be benchmarked against what the market would actually charge.

No documentation:
Once international transactions cross INR 1 crore in a year, a transfer pricing study is mandatory, not optional. Many SMEs discover this only when an assessment lands.

Informal intercompany loans:
Loans between related entities need to carry an arm's length interest rate. An interest-free loan to your subsidiary is a transfer pricing exposure, not a convenience.

Treating it as a year-end problem:
Transfer pricing needs to be structured upfront. Fixing it retroactively is significantly harder and more expensive than getting it right the first time.

What Non-Compliance Actually Costs

The penalty for getting this wrong can go up to 2% of the transaction value, even if no additional tax is owed. For a business doing INR 5 crore in intercompany transactions, that's INR 10 lakh in penalties before litigation even starts.

Going global is the right move for a lot of Indian businesses right now. The financial structure behind it needs to be just as deliberate as the business strategy.